Counterfactuals are a necessary part of any scientific analysis: If X didn’t happen, then Y would have.  But counterfactuals, by definition, can never be known.  They never occurred, so we can never truly know if the counterfactual would have happened.  For example, there was much debate in the Truman Administration and the US military during World War 2 over whether or not to drop atomic bomb(s) on Japan.  Some argued that the bombings were necessary to end the war: conventional warfare would cost significantly more American and Japanese lives and continue to drag on the war.  Others argued the Japanese were close to surrender and that the bombings were going to cost more innocent lives.[1]  The debate continues to this day.  But the American military did drop the bombs, with estimates upward of 200,000 lives lost. What we can never know for certain is what would have happened if the US military had never dropped those bombs. Of course, just because a counterfactual can never be known does not mean that every counterfactual is reasonable.  Counterfactuals have to be justified.  A good theory and model help us justify our counterfactuals.  If I were to say, “without dropping the atomic bomb, the Japanese military would have unleashed Godzilla upon our soldiers, devastating our military, and then invaded San Francisco,” I’d rightfully be laughed out of the room.  That’s a goofy B-movie plot, but not a reasonable counterfactual for historical discussion.  There’s simply no evidence that Godzilla was a tool of the Japanese military. In international trade discussions these days, the focus is often on the counterfactuals…at least, after protectionists make empirical claims that are easily debunked by the data.  A famous counterfactual revolves around the (oft-cited-never-read) China Shock paper.  If not for China joining the WTO, protectionists claim, the US would be a thriving place, rather than the devastated hellhole it is now. University of Central Arkansas economist Jeremy Horpedahl recently explored the metro areas hit heaviest by the China Shock (as identified in the original China Shock paper), and he found something surprising to everyone except economists: [A]ll of the MSAs hit hard by the China Shock still managed to have significant and positive real wage growth across the distribution since 2001…Wage gains in several of these places, in fact, are better than the national trends. And, except for the Hickory, North Carolina MSA[2], all MSAs have more jobs now than before the China Shock. Austin, Texas has doubled the number of jobs.  The overall economic changes in these areas are rising real wages for all income levels, more jobs, and a growing economy. These changes suggest that trade has been good for the region: newer, higher-paying jobs have entered to compensate for the lower-paying jobs that were lost (as trade theory predicts). If trade were restricted, these better, higher-paying jobs would likely be lost. But what of the individuals laid off?  Do they lose their well-paying factory jobs and have to take low-paying service sector jobs?  The evidence indicates “no.”  In his 2025 book Crushing Capitalism, Cato Institute economist Norbert Michel provides evidence that displaced workers were not necessarily made worse off.  Using data from the BLS, Michel found that about 43% of workers displaced between 2001 and 2003 earned as much or more than their previous job.  Between 2015 and 2017, that figure was 51% (pg. 70 of the Kindle Edition).  During the China Shock, displaced workers found it easier to find new jobs that paid the same or better.  Looking even further back, in 1991–1992, only about 1/3rd of reemployed workers had pay at or higher than their previous job (ibid).  Furthermore, over two-thirds of people displaced were finding jobs quickly (within a year), and again, those jobs were paying at or better than previous wages.  Since NAFTA and WTO,  it has become easier for displaced workers to find employment at or better than their previous jobs. So, the relevant counterfactual to compare against increased trade is not that, the US with a thriving economy and protectionism in place.  Instead, the data indicate that higher-paying jobs would be lost in favor of lower-paying, less productive jobs.   — [1] There are other arguments, such as retribution for the heinous war crimes the Japanese committed during the war, but this post is about counterfactuals, not retribution, so I won’t be dealing with those arguments. [2] Hickory could have fewer jobs because the town is becoming a retirement hotspot.  Retired people don’t work. (0 COMMENTS)

These tweets caught my eye: I suspect that it would be possible to create some sort of argument that the AI boom is hurting the job market, but at the risk of being unserious I don’t find this one to be particularly persuasive.  Suppose I made the following argument: Interest rates would be lower if we went into recession, which would help employment.  “Economic booms don’t hurt the job market” is an unserious view. Long time readers have probably guessed that I’d view this hypothetical claim as an example of the fallacy of “reasoning from a price change.” In some respects, it is surprising that the labor market is so strong.  We had a period of high inflation during 2021-23, and unemployment often rises sharply when the Fed uses a restrictive monetary policy to bring inflation back down.  Why has unemployment merely edged up from 3.4% to 4.2%?  I’m not certain, but perhaps because the disinflation policy was gradual, and even today inflation remains above the Fed’s 2% target.  Nonetheless, if the labor market is currently a bit subpar, it is probably due to the lingering effects of the Fed’s anti-inflation policy, not the AI boom. I certainly agree with claims that unemployment might rise if the Fed pushed interest rates above their natural rate.  But an AI boom tends to raise the natural rate of interest.  Other things equal (including the Fed’s target interest rate), a higher natural rate of interest is actually expansionary—likely to lead to faster NGDP growth.  Of course other factors such as the lower rate of immigration tend to reduce the natural rate of interest, so I’m agnostic on the question of whether monetary policy is currently too tight.  (As an aside, TIPS markets are currently pricing in about 2.5% inflation over the next 5 years, which doesn’t suggest that money is particularly tight.) Perhaps there’s an argument that AI spending crowds out more labor intensive industries, although in principle the Fed should offset that effect.  Of course monetary policy is not perfect, but the internet boom of 1999-2000 doesn’t seem to have hurt the labor market.  In 2000, unemployment fell to the lowest level since the 1960s. We eventually did have a mild recession, after the Fed engineered much slower NGDP growth in 2001. (0 COMMENTS)

The August 29 planned abolition of the de minimis customs exemption in the United States may come as a shock to those who believe that, as the physical universe is made of visible matter and dark matter, the political world is made of Democratic and Republican stuff, “the Left” and “the Right.” The restriction of de minimis was launched under Democratic rule and is pursued under Republican rule. (See “End of De Minimis Alarms E-Commerce Sellers, Consumers,” Wall Street Journal, August 5, 2025; “Crackdown on Tariff Exemption Snares U.S. E-Commerce Retailers,” Wall Street Journal, January 30, 2025; and “Biden Takes Aim at China’s Temu and Shein With Trade Crackdown,” Wall Street Journal, September 13, 2024.) The use of the Latin expression de minimis (de means “about” and minimis is “small things”) is inspired by the Roman maxim De minimis non curat praetor, that is, “the praetor does not concern himself with trifles.” Under the Roman Republic, the praetor was a sort of judge who administered civil justice in Rome and its foreign territories. The maxim is often interpreted as saying that the law is not concerned with insignificant things or breaches. De minimis is used notably to describe an exemption to customs duties (tariffs). In the case of the US, goods imported from abroad and worth less than $800 are exempted from tariffs, if not restricted by other laws. The legal source of this exemption is 19 U.S.C. § 1321(a)(2)(C), part of the famous Smoot-Hawley Act of 1930 as amended. Accordingly, until now, when you order goods worth below the threshold from a foreign country, you do not have to pay the tariff as a condition for putting your hands on your package. De minimis on goods from China has already been terminated in May. The benefit of this exemption has become more important as American tariffs have much increased—from a weighted average of 2.2% last year (WTO figure) to a range of between 10% and 50% today. They want, as they say in collectivist circles, to “close the loophole.” The abolition of the little freedom allowed by de minimis is more significant than one may think. For the government, the exception had the benefit of keeping “the people” quiet by hiding some tariffs. When goods are imported by commercial intermediaries, the tariffs are a hidden tax in another way: past the importer, they are silently incorporated in prices. When a consumer wants something and a supplier offers it at an agreeable price from wherever it is, only coercion can prevent a trade. Suppliers are very entrepreneurial in their efforts to serve the consumers. Platforms such as Shein, Temu, or Etsy discovered that they could connect an American consumer and a foreign supplier who will ship the ordered product directly to the consumer, allowing the latter to avoid tariffs through the de minimis exception. These trades have grown rapidly over the past few years, from 637 million shipments to Americans in 2020 to 1.36 billion in 2024. These are not billionaire trades: the average package is worth $54 (in 2023). The platforms in question are often used by small American entrepreneurs who fill their orders with goods made in, and shipped from, foreign countries. Aren’t the American producers and consumers involved part of “the people”? This question reminds us of a central thesis of Anthony de Jasay: “governing” means harming some individuals in order to favor others. In the case under consideration—the suppression of de minimis—some workers and shareholders in American manufacturing are the main beneficiaries, at the cost of American consumers and shippers among others. Note that when trade is restricted—when, for example, the state takes a cut on what its subjects order from abroad—the consumer’s freedom and habit of ordering is partly replaced by the capacity of some domestic producer (say, a manufacturing shareholder or worker) to order the patronage of a domestic consumer. More generally, all this reminds us of some fundamentals of social, economic, and political life. We must reframe the fundamental fault line in politics as the distinction between the primacy of collective (and political) choice and the primacy of individual (and private) choices. The primacy of individual choices means that a collective choice is an exception, possibly justified by a requirement of theoretical unanimity as explained by the school of constitutional political economy; while the primacy of collective choices means that individual choice results from a loophole. This way of looking at the situation parallels the distinction between a social arrangement where everything not explicitly forbidden is allowed and a political system where everything not explicitly permitted is forbidden. Anthony de Jasay justifies the first alternative partly with the epistemological argument that the second one would, in practice, require a nearly infinite list of what is permitted. A companion argument is that forbidding everything would cancel the benefits of life in society for most people (except the forbidders). We are thus led to discover that in a collectivist political system, liberty is a loophole that the collective can close at will, i.e., at the pleasure of its rulers. That collectivism and individualism are a matter of degree, at least on the border between them, does not void the argument for a general presumption in favor of individual choices. (0 COMMENTS)

Question: Suppose the demand for fentanyl is perfectly inelastic, and that the users of fentanyl steal from others to acquire the money to pay for it. In an effort to crack down on fentanyl use, the government imposes harsher penalties on suppliers of fentanyl, reducing its supply. How will this policy affect the amount of stealing by fentanyl users?   Solution: Students sometimes resist the idea that the law of demand applies to addictive drugs. I understand why: if something is addictive, it seems like people will consume it no matter the price. While that isn’t strictly true, let’s follow the assumption in the question that demand for fentanyl is perfectly inelastic. What does that mean? Perfectly inelastic demand means the quantity consumed does not change when the price changes. Graphically, the demand curve is a vertical line. Users consume the same amount regardless of price. Now consider what happens when the government cracks down on suppliers. The reduced supply does not change the equilibrium quantity consumed, since demand is perfectly inelastic. Instead, it raises the market price of fentanyl. Here’s the important step: because users continue to buy the same quantity but at a higher price, their total spending on fentanyl rises. Since they finance their purchases through theft, this means the amount of stealing increases. A simple numerical example makes this clear. Suppose a user buys one unit of fentanyl each week at $100, stealing $100 to do so. If supply restrictions raise the price to $150, the user still consumes one unit per week but now must steal $150. Stealing rises one-for-one with the higher price. So, when demand is perfectly inelastic, reducing supply does not lower consumption. Instead, it raises prices—and in this case, leads to more stealing. If the assumption of inelastic demand were true, a more effective policy would target reducing demand rather than supply. (0 COMMENTS)

Cold plunges. Exogenous ketones. Pu-erh tea–but hold the breakfast: it’s all par for the morning routine, at least if you’re entrepreneur, self-experimenter, and king of the lifehacks, Tim Ferriss. From how he manages the challenges of his celebrity to how he manages to stay in great shape; how he does–and when he doesn’t–harness the power […] The post Tim Ferriss on Tim Ferriss (and much much more) appeared first on Econlib.

  Government Should Experiment with Eliminating Patient Barriers, Not with Covering Ozempic by Akiva Malamet, Bautista Vivanco, and Michael F. Cannon, Cato at Liberty, August 11, 2025. Excerpts: While Ozempic and other GLP‑1 drugs are great at helping patients lose weight(among many other promising uses), these impressive medications come with an impressive price tag. For those paying out of pocket, a month’s supply can cost around $1,000. Congress prohibits Medicare from subsidizing anti-obesity medications but allows GLP‑1 drugs for the treatment of diabetes and cardiovascular disease (a particularly vulnerable subset of its beneficiary population). The Congressional Budget Office studied the budgetary impact of authorizing Medicare to subsidize anti-obesity medications. It concluded that subsidizing GLP‑1 drugs for obesity would have a net cost to taxpayers of $31.5 billion between 2026 and 2034. And: More recently, our colleague Jeffrey Singer argued that Congress can and should eliminate FDA barriers for compounding pharmacies. Singer also emphasized the benefits of removing prescription requirements. Combined, these reforms would significantly increase competition and render GLP-1s more accessible. In a competitive market, price-sensitive patients put downward pressure on the prices of the medical goods and services they need or want. Medicare, Medicaid, and the tax exclusion for employer-sponsored health insurance create multiple levels of separation between patients and the price of medical goods and services. The more insensitive patients are to the price of care, the less pressure they put on providers to reduce prices. This makes health care more expensive and less accessible for everyone.   Employer-Sponsored Green Card Processing Takes 3.4 Years, All-Time High by David J. Bier, Cato at Liberty, August 11, 2025. Excerpt: Immigrant workers seeking a green card—which denotes legal permanent residence in the United States—now face almost a three-and-a-half-year wait to make it through the government’s regulatory morass. Paying a $2,805 fee could reduce this wait to “only” 2.8 years. Since 2016, the government has added over 18 months to the average green card process. This needs to change to keep America competitive. The processing delays come on top of the time to wait for a green card cap slot to become available under the annual green card caps (which is often many years). They also don’t include the time spent complying with regulations prior to the first filing step. This prefiling period can take months. DRH comment: I’m so glad I got my green card in 1977, when it took only a few months.   The Price of Pragmatism: How the Court’s Retreat from the Constitution Fueled Mass Incarceration by Mike Fox, Cato at Liberty, August 11, 2025. Excerpt: NYU Law Professor Rachel Barkow has written an extraordinary new book, Justice Abandoned: How the Supreme Court Ignored the Constitution and Enabled Mass Incarceration. It is a damning indictment of our judicial system’s complicity in the dramatic expansion of incarceration over the past several decades. Judge-made changes in the law have created a new status quo: The United States—with five percent of the world’s population—now contains 25 percent of its prisoners. Barkow’s central thesis is that the Supreme Court has failed to execute its core function: to safeguard individual liberties against the encroaching power of the state. Even worse, it has cloaked this failure in the guise of public safety. As Barkow explains, the Court has refused to “police the police.” When supervision of government fails, egregious abuses of authority go unchecked. The Court’s failure to enforce constitutional guarantees has enabled mass incarceration to metastasize.   DRH Note: I didn’t notice until I started posting, but 3 out of 3 of my weekly highlights are from one source: Cato at Liberty. Good for them. So would be the 4th, so I’ll refrain from posting it and, instead, post a link to an excellent forum held by the Independent Institute.   What If Everything You’ve Heard about the 1619 Project Is Wrong? by Jeff Hummel and Phil Magness, Independent Institute, August 13, 2025. Jeff does an excellent job of questioning and Phil knocks it out of the park with his answers. Truly amazing how low the New York Times sunk. I recommend listening at 1.25 speed. You won’t miss much by skipping Q&A, which starts at about the 42:00 point, although there is an interesting question (and an informative answer) about how Abe Lincoln thought of getting slaves to emigrate. Even if you have little time to listen, check out the story of the New York Times fact checker at 15:14. My favorite line, though, which gave me goosebumps, is at 12:34.   (0 COMMENTS)

Most advanced countries are democracies. In most cases, these countries impose heavy taxes, with total revenues often falling between 30% and 50% of GDP. And yet, most people don’t like paying taxes. How can we explain this seeming contradiction?The mainstream view of both the economics profession and the general public seems to be that a fairly high level of tax revenue is desirable, say at least 25% of GDP.  In this post, I’ll take as a given that the institution of taxes is beneficial to the general welfare. My own view is that the world would be better off if most countries reduced the size of their governments to well below 25% of GDP (as in Singapore). But even I am in favor of governments raising a substantial amount of money via taxes. Thus, for the purpose of this post, I’d like to bypass the issue of whether taxes are too high and consider why democracies are able to enact large tax regimes despite the fact that most voters don’t like paying taxes.   I think it’s fair to say that the typical voter has a sort of “not in my back pocket” attitude toward taxes. They would prefer than someone else pays for government services. If they are poor, they might prefer taxes on the rich, and if they are non-smokers they might prefer taxes on cigarettes. My local government in Mission Viejo does not vote to tax local residents and then send the money to Washington DC to fund the military. It is assumed that the federal government will raise taxes for that purpose. Mission Viejo raises taxes for local services like schools and police.  But despite this NIMBP attitude, governments in democratic countries raise vast sums of tax revenue. The implication of this is clear, the unpopularity of taxes does not prevent high tax rates, even in democratic countries.  The key is the raise taxes at the same level as the benefits that will be delivered.  Local taxes for local services and federal taxes for federal programs. Matt Yglesias was recently asked this question: It seems probable to me that a major obstacle to YIMBYist goals is that they are unpopular. How do you square your advocacy for YIMBYism with the philosophy of popularism? He gave an extensive answer, which included these observations: There are some people who sincerely welcome new development very close to their home, but they are a minority. Most folks, if they could have their way, would like to see lots of construction jobs and plenty of affordable housing and a growing economy and tax base, but also for all that construction to be happening somewhere else. That’s why it’s called Not In My Backyard, not Principled Hostility to Housing. The problem with NIMBYism in this sense is that it’s literally not a policy that can be done. If a state government could achieve housing abundance, but with none of the abundance occurring in your backyard, you might love that. But their actual options are “give every locality a veto so nothing gets built” or “reduce local ability to veto so some stuff gets built.” For a long time, politicians seem to have felt that “everyone gets a veto” was the best way to approximate what voters want. Over time, though, the problems with systemic housing scarcity have started to pile up and become more and more obvious, and more and more people are becoming convinced that “less veto everywhere” would actually be a better outcome. In my view, the biggest barrier to higher living standards is housing (with health care a close second).  Food and clothing comprise an ever smaller share of consumer budgets.  Cars have become so good that the vast majority of Americans drive what once were regarded as luxury cars.  (My Nissan Maxima is vastly better that the Cadillacs and Mercedes of the 1970s or 1980s.)  The real price of home appliances has fallen so much that people often just throw them out rather than call a repairman when they have problems. People eat out much more often.  For many people, the type of house they can afford is the key determinant of how well they are doing.  NIMBY regulations have pushed up the real cost of housing in many areas.  Kyla Scanlon recently observed that this was making people unhappy: John Burn Murdoch points out that young people are extremely unhappy in the Western world because society broke its promise of a home them – there is no faith in the future of the system, so people turn to ripping each other apart. Housing abundance is highly popular with the public, just as Social Security, Medicare, policemen, firemen and the public schools are popular.  But just as most people don’t like paying taxes, most people don’t wish to see new housing built right next door.  From this perspective, both government services and housing abundance are collective action problems, which are hard to solve at the individual level. (Once again, I’m giving the standard view, which I only partly accept.) However, there is one important sense in which this analogy breaks down.  Unlike the provision of various government services, housing abundance does not require any affirmative government action.  Rather it would require certain types of governments (i.e., state and local governments) to cease engaging in actions that restrict housing construction.  The most local level of all is the individual homeowner.  At that level, YIMBYism suddenly becomes much more popular.  Do I wish to sell my home for $5 million to a developer who wishes to put up a tall apartment building in Mission Viejo?  Yes!! Proponents of local zoning rules will often cite an “externality” argument for government regulations restricting housing construction.  But as Yglesias points out, that sort of NIMBYism is internally inconsistent. A homeowner who freely chooses to sell to a developer imposes negative externalities on their immediate neighbors.  A town that restricts housing construction imposes negative externalities on other residents of the state.  A state that restricts building imposes negative externalities on the rest of the country.  A country that limits immigration imposes negative externalities on the rest of the world.  “Popularity” is a tricky concept.  A policy regime that is popular at the local level may be unpopular at the state of national level.  Just as peoples’ aversion to paying taxes doesn’t mean that democracies will fail to enact substantial taxes, peoples’ aversion to an apartment building going up next door doesn’t mean that YIMBYism will fail in a democracy.  Yglesias points out that Yimbys are achieving wins in a wide variety of both blue and red states.  His post provides this figure: PS. A recent study suggests that Los Angeles’ large budget deficit could be closed by building more housing near transits lines. (0 COMMENTS)

I have for many years argued that Anne Krueger and Jagdish Bhagwati should be awarded the Nobel Prize in economics for their work on trade, protectionism, and economic development. Indeed, they should have shared the 2008 Nobel with Bhagwati’s student Paul Krugman. The extensive interview of Krueger in the latest issue of the Journal of Economic Perspectives supports my view of Krueger’s importance. I strongly recommend the whole interview. One of the most striking things is that Krueger dug around in the data in other countries by actually talking to the players. She learned a lot and that’s how she came up with the idea of rent seeking: when government officials have discretionary power, other people lobby to get special permission. Of course, we never see that happening in the United States. I started to excerpt it for my Weekly Reading Highlights for next Sunday, but there are so many nuggets that it deserves a post of its own. Thus this post. The interviewer, Dylan Matthews, is a correspondent for Vox.   Lawyers and Economists on Free Trade KRUEGER: Lawyers who do trade law are more pro free trade than economists, because they know how badly protection works. A distorted economy is terrible. Not just a little bad—import substitution probably cut growth rates in half of what they could have been.   Confessions of Corruption KRUEGER: In both countries, I had a number of encounters with people who talked a great deal about black markets and that kind of thing, and I got interested that way, in part. I had a friend in India from graduate school who was working in Delhi at one time when I was there, and he knew I was interested in this, so he invited several of his friends to dinner. He was well connected and invited ministers and vice ministers. At the end of the dinner he sat back and said, “Because Anne is interested in this, and you can trust her, I want each of you to tell exactly how much more you’ve taken than you should legally have taken in your job.” And they did it! One said, “I only took enough to get my three daughters each an adequate dowry. And that was ₹12 million” [about $1.6 million in US dollars at that time]. One of my very able Indian friends, then a graduate student in India, was forced to leave India because he was so honest. He couldn’t take the money. One of his sons got sick, so he had to work in the States to take care of his son. The corruption had all kinds of human effects that you don’t think about.   Would Helping the Poor with Mortgages Work? MATTHEWS: You left the Fund before the global financial crisis in 2008–2009. Did you have a sense that that was brewing toward the end of your time there? KRUEGER: Well, at the Jackson Hole meetings in 2005, Raghuram Rajan (2005) gave a talk where he described what the vulnerabilities were, why helping the poor with mortgages is not going to work. Why are we sitting on a bombshell? I think it was Larry Summers who said we were Luddites.   Industrial Espionage Goes Both Ways KRUEGER: Let me answer half a question you didn’t ask: the Chinese have on occasion tried very hard, I think, to oblige [the United States]. And I think we have missed the signal completely. I think their system is not a good system, and I think they themselves are not quite capable of understanding why it is not a good system, but this idea that they’re always stealing from us, that we never steal from them is silly. I mean, the idea that there’s no industrial espionage in this country! When I was in Silicon Valley, nobody would send a piece of equipment to any of the electronics fairs, even the big one in Las Vegas, without making sure there was some employee 24 hours a day watching the machinery to make sure nobody could reverse-engineer it. Now we’re so mad at the Chinese that they tried to do the same thing. Meanwhile, we’ve had more than one CIA agent arrested [in China] and pretty much caught dead to rights.   Why “Market Failures” Are Not Enough of an Argument for Government Intervention KRUEGER: Some of these arguments about the market assume that if there are market failures, then whatever the government will do will be better. Maybe the market failures are huge, but that does not persuade me that government failures will not automatically be as huge. That’s the part that’s wrong. I still think that when you’re talking about lots of economic activities, you want to just look at incentives. If there’s something wrong with the market, get the incentives right. Giving bureaucrats the incentive to regulate is not the incentive that will work best in most cases.   The Problems with Economists and Graduate Education Today KRUEGER: Gradually, I think the technique guys took over, theory and econometrics. It weakened the field in several ways, one of which, it set the bar so high that some people just couldn’t do it or didn’t want to do it. Some, who were good, got out, even though they could do it, because they didn’t want [that focus]. In a sense, you’ve gotten the idiosyncrasies of that group. If the price of milk doubled, they wouldn’t even begin to wonder why. That’s a big part of it. The fact that we have supercomputers sets everybody in awe, and all I can see is higher caliber regression, maybe. And I still think you need some theory before you do it. I think at some point it has to reverse a bit. Part of the way it’s reversing is, in my view, a bad way. Namely, the public policy schools are doing economics without enough analytical underpinning. So you get things like the advisers supporting industrial policy in the Biden administration and stuff like that, precisely because they haven’t learned what happened. One thing that the Chicago school, for instance, was so good at was making everybody think in terms of, “What’s the alternative? What’s the opportunity cost? What are the incentives that are created?” One of my eureka days was when Milton Friedman was visiting Minnesota sometime in the 1960s, around when the first law came in restricting auto emissions for new cars, making them more expensive. Milton’s argument was, well, that would mean more pollution. Why? Because, obviously, then people keep their cars longer. To him, it was so obvious. But to me, until he said it once, it wasn’t obvious. [DRH note: Probably because I was educated at UCLA, Friedman’s point would have been obvious to me.] There was so much of that in Chicago. Students learned to think that way. The rest of us had to figure it out the hard way. But Chicago often got it right.   Advice for Young Economists MATTHEWS: I think a lot of the people reading this interview might be in grad school or early in their careers, and want to have an influence in policy. You managed to have a long career in both academia and in policy, and I think had a very positive impact in both places. What advice do you have for someone who wants to follow a similar path? What are the skills to develop, or the opportunities they should take? KRUEGER: I really do think that depends on the individual and what they want, but I certainly am a very strong believer in having a good analytical frame-work. That to me is essential, and that means learning what questions to ask, which is often, “Why are people behaving as they are?” and then looking for where the incentives are. Finding out “why” is the important thing first. In the 1960s, the first answer in development economics was “peasants are irrational.” But of course, Ted Schultz (1964) put paid to that very fast.   My one disappointment: Although rent-seeking is a prominent part of the Krueger story and she definitely deserve credit for the term and for her evidence of its importance, neither Krueger nor Matthews points out that it was actually Gordon Tullock, in a 1967 paper, who came up with the idea of rent-seeking even though he didn’t call it that. [Editor’s note: Bhagwati is also the author of the entry for Protectionism in The Concise Encyclopedia of Economics.] (0 COMMENTS)

Now that we’ve looked at Musa al-Gharbi’s description of what causes Awokenings to rise and eventually fall, what are the long term consequences of these movements? Given that Awokenings consist of wealthy and elite members of the symbolic capitalist class rising in support of antiracism, feminism, economic equality, and other social justice related causes, it’s natural to ask if the outcome is an improvement for women, racial minorities, or the poor. Unfortunately, al-Gharbi doesn’t see much cause for celebration regarding results: Despite their intense focus on social justice issues, Great Awokenings have rarely generated positive outcomes for the genuinely needy or vulnerable. That is not to say the situation for such communities has not improved. Great progress has been made for all of these communities. It’s just that Awokenings as such seem to do nothing to contribute to those improvements – and often end up being counterproductive. For example, With respect to racial equality, for instance, political scientist Robert Putnam shows that gains for African Americans began around 1860 – that is, before any of the Great Awokenings, and indeed, before the Civil War…After the war, Black gains proceeded apace through the 1960s. Gaps between Blacks and whites continued to close… There was no apparent impact from the first Great Awokening on any of these trends—for better or worse. Likewise, the civil rights movement notched most of its successes before the second Great Awokening began—and stalled out thereafter. That is, the second Great Awokening was not responsible for the civil rights movement and its victories. It may have derailed them. The same is true for women: At the end of the nineteenth century, women in the United States began making significant gains in terms of rights and protections, and gaps between men and women on a range of dimensions began to close. These patterns did not accelerate as a result of the second Great Awokening, as many perhaps assume. Instead, they slowed beginning in the mid-1960s. And on many measures, women have been losing ground relative to men since the 1990s (i.e., the third Great Awokening). Overall, the first Great Awokening seemed to have no real impact for better or worse, and “the century from 1860 to 1960 was defined by steady and broad based gains in socioeconomic equality, civil rights, trust in social institutions, religious attendance, union membership, and other forms of civic participation.” These gains began well before the first Great Awokening and were not caused by it, nor did they accelerate during or in the aftermath of that Awokening. The subsequent Awokenings, however, were followed by progress either stalling out or worsening along the very measures the woke seemed to be dedicated to improving. Thus, al-Gharbi says, “There have been shocking reversals across all of these dimensions since” the second Awokening, and the symbolic elite taking the reins of social institutions “has been accompanied by stark declines in equality, social cohesion, and civic participation. The first Great Awokening did little to enhance the pre-1960 ‘upswing,’ and subsequent Awokenings seem to have done even less to halt or reverse the post 1960s declines.” Public opinion has shifted in a much more tolerant direction and away from racism or sexism. Nonetheless, al-Gharbi says, there’s no evidence that any of the Awokenings did anything to create this increase in tolerance and acceptance, or to accelerate it: There is no meaningful relationship between Awokenings and material gains for marginalized and disadvantaged populations, nor is there a meaningful connection between Awokenings and durable changes among the general public. If anything, there has been an inverse relationship between Awokenings and material “progress” from the second Awokening forward. But this doesn’t mean Awokenings don’t have long-lasting effects in other domains. Because elites use Awokenings to raise their own status and take the reins of power in institutions, Awokenings create new rounds of institutional capture by the woke and the elites, and the effects of this are long lasting: Although Awokenings do not seem to be responsible for generating major transformation in society writ large, they often do produce significant and durable changes within symbolic capitalist institutions…Yet, rather than enhancing the position of those who are significantly disadvantaged in society, these opportunities primarily benefit elites from the target populations. Awokenings also provide opportunities for entrenched bureaucracies to expand their own power and influence: Corporate HR departments and their ever-expanding rules and administrative processes began proliferating after the second Great Awokening. They have leveraged every subsequent Awokening to expand their institutional influence… The second Awokening likewise corresponded with the birth and proliferation of administrators to curate and managed diversity at postsecondary institutions, elite K-12 schools, and increasingly the private and nonprofit sectors. These positions have also seen major expansions in the aftermath of each Awokening. Their ranks have swelled to the point that, today, many colleges and universities have nearly as many noninstructional staff as they have undergraduate students, and in some cases more. But just as social justice activism as practiced by the woke seems to have little to do with actually bringing about the ostensible aims of social justice, these new expansions in administrative power also seem to be somewhere between ineffectual and actively counterproductive to their supposed purpose: Nonetheless, it is unclear what (if any) good is being accomplished by this ever-expanding constellation of social justice sinecures beyond providing practitioners with gainful employment. Many of the programs associated with these DEI roles (such as diversity training) are demonstrably ineffective with respect to their stated goals. The proliferation of diversity bureaucrats has corresponded with a significant increase in social inequality and decreases in social solidarity, as highlighted in the previous section… However, as a function of perverse incentive structures within these fields, unfortunate social trends may be good for business. A lack of progress or worsening conditions are not typically interpreted as evidence that DEI-oriented positions and programs are unnecessary or unhelpful. Rather, they often serve as a pretext to demand still more institutional power and resources for DEI professionals. As discussed previously, symbolic capitalists frequently use regulatory capture to erect strong barriers to entry into their professions, both increasing their economic power and serving as a buffer to keep people from insufficiently elite backgrounds from joining their ranks. These barriers, too, tend to ramp up during Awokenings, and this creates a ratchet effect where more and more people are shut out of upward mobility – in the name of social justice. This institutional capture among elites also allows entrenched elites to use tools established in the name of social justice to protect their own position and keep would-be rivals in their place: Under the auspices of promoting social justice, many symbolic capitalist spaces have become “hotbeds of craven snitches” where elites weaponize resources established to protect and support those who are genuinely marginalized, disadvantaged, vulnerable, or victimized in order to settle personal vendettas, gain the upper hand in institutional power struggles, or purge political and ideological opponents… Defenders of what has come to be referred to as “cancel culture” often attempt to portray the phenomenon as folks from less advantaged backgrounds holding the “privileged” to account. In fact, the people engaged in these practices are typically themselves elites or aspiring elites. Again, symbolic capitalists tend to be among the most sensitive and most easily offended sectors of U.S. society. The end result is that cancel culture most often results in either elites keeping down members of the working class, on rarer occasions, elites using these tools to displace someone even more elite than themselves: It is elites who are raised from a young age to understand and learn how administrative systems and processes work, allowing them to know which levers to pull to get people fired or disciplined, even on false or exaggerated charges, while minimizing repercussions or blowback for themselves. It is elites who feel comfortable folding authorities and third parties into their personal disputes, believing that these institutions, processes, and professionals exist to serve their interests (not wrongly), and that the system will typically work to their advantage (not wrongly). It is people from elite backgrounds who simply expect institutions and their representatives to accommodate their personal preferences, priorities, and perspectives—and who will demand to “speak to the manager” when they don’t, and who know how to “speak to the manager” to get what they want. These kinds of knowledge, dispositions, and behaviors toward institutions are part of the “hidden curriculum” of elite childhoods, elite education, and elite culture. Consequently, while there are many cases of elites “canceling” working class people, there are not many cases of non-elites successfully cancelling elites. Even in cases of “punching up,” what is characterized as “holding the privileged to account” is generally an instance in which some faction of elites has managed to purge or inflict damage on someone even better positioned than themselves. Much like cricket or lacrosse in the United States, cancellation is primarily an elite sport. Another long term effect of Awokenings is a loss of trust in institutions by the majority of people. As al-Gharbi extensively documents, the views, goals, and priorities of woke elites tends to be wildly out of step with the very people the woke claim to be seeking to uplift, as well as the views of non-elites more generally. This actually tends to produce a backlash against the views of the woke. The woke tend to explain away this backlash as the “distress of the privileged” – they say the backlash is driven by the rage of racist, sexist white men who are resentful about the improving situation of women and racial minorities created through woke activism. However, al-Gharbi points out this self-serving explanation simply doesn’t match reality: But what this means with respect to interpreting the culture wars is that, when Americans shift right in the aftermath of Awokenings, they are generally not reacting against material changes that benefit marginalized populations at the expense of the majority group. Those have been few and far between and don’t cleanly correlate well with Awokenings in any case. The “backlash” instead seems to be about growing alienation among “normies” from elite culture and elite institutions, whose outputs shift far more during Awokenings than any laws or relative material circumstances between groups. The woke recognize how the values they espouse are out of step with those of most ordinary Americans – but openly interpret this as a simply being a result of their own intellectual and moral superiority: Symbolic capitalists broadly recognize that our political views and sensibilities are different from those of most other Americans. Our preferred narrative to explain these gaps is to appeal to our “superior” knowledge, intelligence, and credentials. The “normies” don’t fail to notice the highly condescending attitude the elites harbor toward them, and this creates significant resentment: Moreover, mainstream symbolic capitalists tend to interpret deviance from, or resistance to, our own preferences and priorities in terms of pathologies (racism, xenophobia, sexism, homophobia, authoritarianism, reactionary closed-mindedness, ideological zealotry, and dogmatism) or deficits (lack of information or education; lack of cognitive sophistication or capability; lack of imagination, empathy, or perspective). This is not hyperbole; it is quite literally the case. Entire lines of scholarly research and journalistic reporting are oriented around determining which pathology or deficit best explains why people deviate from the preferred positions of symbolic capitalists. Huge industries have sprung up trying to exploit big data, predictive modeling, and advances in the cognitive and behavioral sciences in order to “nudge” people into behaving in ways that symbolic capitalists think they “should.” Government and non-profit programs are full of restrictions and requirements that convey that others cannot be trusted to make responsible decisions on their own. Inconvenient social movements are typically explained in terms of some noxious counterelite (e.g., Trump, the Koch brothers, Fox News) “brainwashing” and “duping” an easily manipulated public into pursuing the “wrong” ends. This distrust also impacts scientific institutions, particularly as scientists explicitly use their mantle as scientists to support political activism: In the aftermath of the second and third Great Awokenings, we see significant drops in public trust in scientists. And woke elites also created a loss of trust in institutions by expressing outright antagonism towards the values of “normies”: Within the new elite class, people gained status through delegitimizing and denigration institutions, traditions, values, and ways of life associated with the middle class… Again, symbolic capitalists are generally much further to the left on “culture” issues than most Americans – and Awokenings drive them to stake out positions that are even further out of touch with the rest of their countrymen. Woke elites will tend to denigrate the institutions valued by the normies, even as they themselves continue to take advantage of those very institutions. One example al-Gharbi gives is the traditional family: Indeed, although symbolic capitalists are the Americans most likely to disparage “traditional families,” they are also among the most likely to have hailed from “traditional families” themselves, and to establish “traditional families” of their own. And not for nothing: family structure, sequencing, and stability can make a huge socioeconomic difference in one’s own life trajectory and earning prospects—and for those of one’s children as well… In light of these realities, it’s striking that symbolic capitalists so regularly and conspicuously denigrate to others the very strategies they use to ensure their own socioeconomic prosperity—and typically in the name of social justice, no less! Awokenings, then, appear to do little to accomplish any of the goals ostensibly desired by the woke, and often actually cause progress along those lines to flatline or reverse, while also disrupting social cohesion, undermining public trust in institutions, and allowing elites to further entrench themselves in institutions and create new barriers to upward mobility for non-elites. A striking demonstration of this can be seen in situations where progressive elites have the most institutional control. You might assume that in these places, the goals and values professed by such people would be the most prominently realized. But this is not the case. Speaking of areas thoroughly under the long-running control of progressives, al-Gharbi writes, Now, given the current concentrations of financial and cultural capital into these areas – which are controlled by Democrats to an extent that it approaches one-party rule – it is actually well within the power of mainstream symbolic capitalists and their copartisans to significantly upend the distribution of wealth and opportunity in the United States purely through how they allocate their own resources, manage the organizations and institutions they are embedded in, and leverage large city and state governments that Democrats firmly control. And yet, the regions symbolic capitalists dominate also happen to be the most unequal places in the United States – with an ever-growing share of denizens classifying as either extremely well off or impoverished. Strongholds of progressive control, al-Gharbi writes, are places marked by the highest levels of both poverty and income inequality, and are among the most racially segregated places in the country. He cites California and New York City as examples of places that are rich, highly educated, full of millionaires, and have both been a “Democratic bastion for decades,” yet they have the highest poverty rates in the nation and highest levels of both income inequality generally and racial inequality specifically. New York also has the “ignoble honor of possessing the most racially and ethnically segregated school system in the United States.” Thus, areas where the woke have the most control, and can implement their preferred policies freely and unchallenged, tend to produce results that are the worst by the standards of the woke themselves: As New York Times economic analyst Binyamin Appelbaum put it, “Blue states are the problem: Blue states are where the housing crisis is located. Blue states are where the disparities in education funding are the most dramatic. Blue states are the places where tens of thousands of homeless people are living on the streets. Blue states are the places where economic inequality is increasing most quickly in this country.” Despite Democrats describing Republican efforts to restrict the ballot as “Jim Crow 2.0,” blue northeastern states also happen to have some of the heaviest voting restrictions in the country. Another consequence of Awokenings is the rise of what al-Gharbi and others have described as “victimhood culture.” We’ll look at what victimhood culture is, and how it interacts with the ideas of the woke, in the next post. (0 COMMENTS)

Short Version: it’s bad, even by the preferred metrics of protectionists. On July 23, US and Japanese trade negotiators reached a deal on tariffs, investments, and other international transactions.  Much has been written about how bad the deal is from a standard economic perspective (see, for example, here).  But President Trump and his administration, who negotiated the deal, are mercantilist.  So here, I evaluate the trade deal from the mercantilist perspective, focusing primarily on the trade deficit. A few notes first: Details of not only this deal, but the others negotiated, are sketchy and subject to dispute.  In order to give the Trump Administration the benefit of the doubt, I will be using their announced conditions. These are not deals in the traditional sense of legally binding agreements.  As best we can tell, they are verbal assurances of a potential framework for a legally binding agreements down the line.  But, for the sake of argument, I will treat this deal as if it were a formal, legally binding agreement between the two nations. With the preliminaries out of the way, let us begin. Trade Deficit For mercantilists in general, and President Trump in particular, a trade deficit is a major concern.  Indeed, for the Trump administration, it is the overriding concern.  He invoked the authority to do these deals by declaring the mere presence of a trade deficit to be a national emergency. Therefore, let us begin our analysis by looking at what effect this deal will have on the trade deficit. This deal will necessarily increase the US trade deficit with Japan.  Part of the deal is a $550 billion investment by Japan into the United States.  When a foreign investor invests in the US, that necessarily increases the trade deficit, because that is how the transaction is recorded in the National Income Accounts.  So, this investment part of the deal will increase the trade deficit. Furthermore, the Japanese will need US dollars to accomplish this investment.  The only way they can get those dollars is by selling goods to Americans.  That means American imports from Japan will necessarily have to rise, and American exports to Japan will necessarily either not change or fall.  Since a trade deficit is defined as when exports are less than imports, under this scenario, the trade deficit must rise. There is another, indirect way in which the trade deficit will likely worsen.  The US tariff on Japanese cars is now 15%.  US automakers face a rash of higher taxes, including steel tariffs (50%) and auto parts tariffs (various).  Japanese automakers do not face such tariffs.  Consequently, Japanese imported cars will now be relatively cheaper than their American-made competitors.  On the margin, Americans will purchase more imported cars than domestic cars.  Similarly, American auto exports to Japan are now relatively more expensive, which will reduce exports.  Again, the trade deficit rises. Thus, given the mercantilist concern about the trade deficit, this deal is a bad one. Protecting Jobs A lesser concern for mercantilists is protecting jobs.  The effect the deal will have on jobs is ambiguous.  Assuming the investment deal goes through and doesn’t turn into a significantly scaled-back project like Foxconn, some jobs will be created in the United States, intended to be in LNG exports.  But, as discussed above, American auto manufacturers now face significant competition from Japanese auto firms.  And so, some jobs will be created.  Others, destroyed.  The net effect is probably close to zero.  Thus, from the mercantilist perspective on jobs, this deal is potentially bad, especially since autoworkers are another industry the American mercantilists wish to protect. Conclusion Other details of the deal are still obscure, so there is not much more to write.  But, given the information we do have based on the announcements from the Trump Administration, this is a bad deal by their own metrics. (0 COMMENTS)